Question
Please provide really good explanations. QUESTION 11 [Q11-Q13] HP and Dell are companies in the exact same business. They both used to have the same
Please provide really good explanations.
QUESTION 11
[Q11-Q13] HP and Dell are companies in the exact same business. They both used to have the same capital structure with a debt-to-equity ratio of 1/19. Recently, however, Dell hired many investment bankers and consultants at great expense, and decided to change its debt-to-equity ratio to 1/5. HP figures that they will copy Dell, and move their debt-to-equity ratio to 1/5 as well.
HP doesnt want to pay for the bankers and consultants that Dell used. Thus, HP relies on you to help them understand the transition.
Assume the following: HP used to have a cost of equity of 20%. Assume that regardless of its capital structure, HPs cost of debt is 3%. The change in D/E is expected to be permanent. Further, HPs tax rate is 30%.
[Step 1: de-levering] Find the cost of unlevered equity for HP.
| A. | 16.35% |
| B. | 19.00% |
| C. | 19.15% |
| D. | 22.38% |
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